Covid-19 – Extension Of $7.5 Million Subchapter V Debt Limit

As previously reported by DarrowEverett, the Small Business Reorganization Act of 2019, created Subchapter V of chapter 11 of the Bankruptcy Code, which became effective on February 19, 2020 (11 U.S.C. §§ 1181-1195 “Subchapter V”). Subchapter V focuses on small business debtors and aims to remove some of the complexity and costs associated with a traditional chapter 11 case. These benefits include elimination of the “absolute priority” rule (allowing owners to retain their equity in the business over the objection of a class of unsecured creditors); a more rapid process (a plan of reorganization must be filed in 90 days); and reduced administrative expenses (lower legal fees, no creditors’ committee fees and no quarterly fees to the U.S. Trustee).

In response to the COVID-19 crisis, the CARES Act expanded Subchapter V eligibility for a period of one year by increasing the debt cap from $2,725,625 to $7,500,000 in aggregate secured and unsecured non-contingent and liquidated debt. The expanded eligibility debtor-friendly rules made Subchapter V an even more attractive option for larger than originally-contemplated businesses which seek to benefit from its streamlined approach.

As reported by the American Bankruptcy Institute, Subchapter V has proven popular, with over 1,400 cases filed in the last year. According to Bloomberg Law Dockets, Subchapter V cases accounted for almost 23% of chapter 11 filings nationwide. Approximately 30% of those cases would not have qualified for relief under Subchapter V but for the higher debt limits allowed by the CARES Act. The American Bankruptcy Institute also reports that Subchapter V cases are experiencing higher plan-confirmation rates, speedier plan confirmation, more consensual plans, and improved cost-effectiveness than if those cases had been filed as a traditional Chapter 11 case.

The higher debt ceiling for Subchapter V was scheduled to expire on March 27, 2021, which would have forced many businesses (or individuals) with higher debts to file for the more cumbersome traditional chapter 11 reorganization or forgo bankruptcy altogether and likely liquidate. Recognizing the early adoption and continued utilization of Subchapter V by this subset of the small business community, the United States House of Representatives passed the Senate-amended version of H.R. 1651, the “COVID-19 Bankruptcy Relief Extension Act of 2021,” to extend the $7,500,000 debt ceiling through March 2022. President Biden signed the measure into law on Saturday, March 27, 2021.

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